Can The Surge In Sugar ETFs Continue?

sugarThe rally in sugar prices seems to be unstoppable when most of the other commodities are finding the going tough. Its days of a supply glut ended in late August when future prices touched the lowest point since 2008.

Since then, raw sugar prices at New York Mercantile Exchange recovered nearly 40% to around 14 cents per pound as of October 27, 2015, despite a surprising 1.5% fall in Tuesday’s trading session.

The recent strengthening of the U.S. dollar on the back of Euro zone and Chinese stimulus measures could not derail the greenback priced commodity off the track. In fact, Morgan Stanley (NYSE:MS) predicted raw sugar prices on the New York exchange will average 15.2 cents per pound in the final quarter of 2015 and 17.3 cents per pound in 2016.

The advantage lies primarily in adverse weather conditions across the globe causing supply bottlenecks. Brazil, the world’s largest sugar producer accounting for 40% of global exports, is expected to witness above-average rainfall linked to a strong El Nino in growing regions that could disrupt the harvest, leaving a chunk of cane left to cut.

Moreover, biofuel mandates and modification in energy taxation in Brazil are prompting sugarcane processors to convert cane for ethanol production instead of raw sugar, limiting its supply in the world market. According to the Brazilian Sugarcane Industry Association, or Unica, ethanol production in south-central Brazil went up 2.6% year over year to 20.2 million kiloliters while sugar production dipped 7.2% to 23.2 million tons during the April-September period.

India, the world’s second largest sugar producer, is also expected to trim sugar production due to El Nino-induced drought in the region. Per Indian Sugar Mills Association, India is likely to cut its sugar output by 5% to 28.3 million tons in 2015.

Other major sugar producing countries such as Thailand and China are also hit by droughts and are expected to cut sugar output. According to the International Sugar Organization and U.K. sugar trading house Czarnikow, there will be a sugar shortage of roughly 3–5 million tons in the global market for the current crop marketing year, which began this month.

These apart, there are other factors that are driving the sugar price rally. China, the world’s largest importer of raw sugar, recently released data that showed a robust 80% year-over-year hike in sugar imports in September to 656,000 tons. It was the highest recorded volume since 2013, as per data from Commerzbank.

Further, a recent report from Commitment of Traders revealed that hedge funds have been betting on sugar at a lower-than-expected pace, indicating the availability of surplus money to aid further rallies.

Riding on the continued surge in sugar prices, ETFs that are exposed to this soft commodity have been experiencing double-digit gains over the past one month (as of October 27, 2015).

Below we highlight three of those ETFs that investors should definitely consider to play the bullish sugar market.

iPath Dow Jones-UBS Sugar Subindex Total Return ETN (NYSEARCA:SGG)

SGG tracks the Dow Jones-UBS Sugar Subindex Total Return Index, which provides the returns that are in an investment in the futures contracts on the commodity of sugar. The note has garnered nearly $60 million in assets and trades in a daily volume of roughly 54,000 shares on average. It charges 75 bps in annual fees. The note was up 18.1% in the past one month and has an ETF Rank #3 (Hold) with a High risk outlook.

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